Authors: Lawrence Geller and Russell B. Still, Senior Consultants, Medical Management Associates, Inc.
Editor's Note: This is the second in a series of articles on starting a solo ophthalmology practice. Read Starting a Solo Practice: The Pros and Cons, Part One.
A business plan is a critical document used by lenders to evaluate your risk level for a loan. It describes to the lending institution why the ophthalmologist needs – and deserves – a loan to finance the capital and excess operating costs associated with starting a practice. By drafting a detailed and realistic plan, your loan officer will be convinced that you’re a good risk for the bank to take. He or she will subsequently work diligently to sell it to the bank underwriter and loan committee even if you don’t meet all the loan criteria.
You might think a business plan is unnecessary if you can start your practice without resorting to a lender. But even ophthalmologists who can obtain financial support from their local hospitals or other means need a business plan. It serves as a crucial basis for tracking the progress of the practice during the first 24 months, the length of the period covered by the initial plan.
Basics of a Business Plan
- Summarize your relevant education and background. Include your résumé, and highlight the important aspects of your training and experience in the summary. This would apply regardless of whether the ophthalmologist is just completing training or leaving a group to start his own practice.
- Describe the practice opportunity – i.e., the demographic basis for your expected business success. This might include area population, household income, growth data and competition. Show how your market compares with national benchmarks of ophthalmologists to population. Document the level of interest that local insurance plans have in adding more ophthalmologists to their panels. If you are leaving a practice, the bank will be interested in knowing whether you are subject to a non-compete with your former practice.
- Explain how you intend to market your practice to the public and to primary care physicians and how you will establish relationships with optometrists to co-manage surgical patients.
- Describe the services you will provide. Will the practice be housed in a retail setting and offer LASIK, premium IOLs, or cosmetic services or will it be more traditional and located in a medical office building?
- Obtain input from local business people or hospital representatives about the need for a new ophthalmology practice in the area and detail how your practice will meet an unmet need in the market.
Projected Revenues and Expenses for the First Two Years
Projecting revenue is the most challenging part of the budget. Revenue is driven by volume: How many patients will you see each month? How many surgeries do you expect to perform per month? Ideally, you should project this information by CPT code or determine your average charge per patient. Your ramp-up volume is critical since that will drive your cash flow requirements. Base your collections on how much the insurers will pay, not on the fees you charge your patients. To determine how much cash the practice will generate, you have to research how much Medicare and other insurance carriers will pay for services and how long will it take them to reimburse you. The practice will collect a co-payment at the time of service, but the portion of the charge paid by the insurance carrier may not be paid for thirty (30) days or more. A typical ramp-up in collections for a start-up ophthalmology practice might be as follows:
|Month One||5 percent of charges|
|Month Two||15 percent of charges|
|Month Three||15 percent of charges|
|Month Four||10 percent of charges|
|Month Five||10 percent of charges|
|Collection Rate||55 percent of charges|
In other words, 5 percent of the charges for services billed in month one are collected that month, but it will be five months before the practice achieves its total collection rate of 55 percent for every $1.00 charged.
If you expect to provide private pay services such as LASIK, or cosmetic surgery, these should be separately budgeted in your projections. Ophthalmologists of course can leverage their patient base by providing other services, such as an optical dispensary. However, you may not have sufficient volume to support an optical dispensary, at least initially.
The operating budget is typically set up on a cash basis, as opposed to an accrual basis. The difference is timing. In cash accounting, the practice records the transaction when it receives payment or pays the expense. In accrual accounting, the practice records the revenue when it provides the service and record the expense when billed. Therefore, the operating budget predicts how much cash will come in and go out on a monthly basis for the first 24 months of the business. This is commonly referred to as "cash flow".
While you probably will provide separate information to supplement the business plan, the text of the plan must make a compelling case for your practice’s potential for success.
Address What You Need to Finance
Capital needs for space and leasehold improvements: Determine how much space the practice will require and the cost of making leasehold improvements to the space. About 2,500 square feet is typical for an ophthalmology start up. You may work with a leasing agent to locate a space. Determine how many lanes there will be, diagnostic equipment needed particularly equipment which requires a separate room or space such as for visual fields testing. Also include private offices for doctors, management and other staff, plus a private room for patient counseling. Don’t overlook space requirements for the server or records storage. Improvement costs vary substantially, depending on the lease terms. Make sure you thoroughly understand them.
Estimated Staff costs: How many techs and support staff will you need? How will you decide when you need to add staff? How much you expect to pay in salaries and benefits such as payroll taxes, health insurance, life insurance and any other fringe benefits? Payroll will be your highest cost.
Professional services: accountant, legal, practice management consultants
Itemized total furniture and equipment budget: This includes the practice management and electronic medical record system plus diagnostic equipment. (Note: It is preferable to purchase rather than lease, except for specialized equipment, or in cases where you have limited loan funds.) Consider network hosting options for your computer system that could reduce initial costs.
Marketing and advertising budget: Develop your marketing plan along with estimated costs. These costs might include a website; newspaper advertisements; notices in community bulletins or magazines; patient and physician announcements and an open house. Your costs could range from a few hundred dollars to the tens of thousands of dollars. It’s important to estimate and thoroughly research the items you need up front.
Other Operating Cost: You will need to estimate your initial inventory of office and medical supplies plus rent, insurance, supplies, telephone and other ongoing expenses. Ask your medical and office supply vendors to help you estimate your cost for initial inventory. Alternately, consider the cost of two months of supplies for your operating budget. Other costs such as medical license, credentialing, utility deposits, initial malpractice premiums, etc.
Compensation: What is the cost for your own compensation, fringe benefits and direct expenses?
You will also need to address how you intend to repay your loan.
You Don’t Need to Go it Alone
While you have been trained in diagnosing and treating ophthalmic conditions, you may not have the skills, information or experience needed to prepare a business plan for a new ophthalmology practice. Seek the services of a practice management consultant or other professional who can help you write the business plan and prepare the financial forecasts. The AAOE Consultant Directory is a good resource to identify consultants.
You don’t need a Wharton MBA to write a business plan, but as a solo ophthalmologist/entrepreneur, you do need to conduct extensive research and make good, sound judgments about the economics of your practice during its first two years. As patient volume increases, you may find it worthwhile to finetune your projections for the first two years as that will allow you to better predict cash flow for your practice. After that initial period, reassess your situation and consider developing short and long-term plans for the next five (5) years. Reassessing your situation periodically is a must as general economic conditions change and practice economics evolve.
ABOUT THE AUTHORS
Lawrence Geller and Russell B. Still are senior consultants with Medical Management Associates, Inc., in Atlanta. They have been advising physicians and hospitals on medical practice issues for the past 20 years. Larry is a member of the Academy's Consultant Directory.